Has Microsoft abandoned its pursuit of Yahoo!?

Microsoft has given strong signals that it is no longer holding out hope of acquiring Yahoo! and instead plans to spend US$2.5bn a year in an effort to bring the battle closer to online ads and search rival Google.

At an investors meeting at its headquarters in Redmond, near Seattle, Microsoft chief executive Steve Ballmer and Chris Liddell outline the road ahead.

Despite declining a US$46.6bn offer from Microsoft only a few months ago, Yahoo!’s stock is declining and the company is now willing to be sold for US$33bn.

However, Ballmer says he was firm on the subject and explains the window of opportunity has passed in terms of what he wanted to accomplish had he bought the company.

Recently two more attempts to buy Yahoo! fell apart and even though investor Carl Icahn, who allied with Microsoft, is now on Yahoo!’s board, it seems Microsoft has developed an alternative plan that will require spending US$2.5bn a year to become a real threat to Google in the US$1trn market for internet media.

If anything, Ballmer reasons, without Yahoo! Microsoft has more flexibility to take on Google. “There’s a huge, huge, huge, new opportunity around the net and online and we need to embrace that opportunity. We’re anteing; we’re reinventing,” Ballmer was quoted as saying in the LA Times.

Ballmer believes the opportunity for online advertising is too big to ignore and pursuing a world where everything goes digital could see Microsoft grow by between 40pc to 60pc of its current economic value.

Online ads will double to US$51bn in the US alone, according to figures from eMarketer.

Ballmer says the US$2.5bn a year investment for the foreseeable future is vital, as Microsoft will need to get greater scale in the internet business that is currently dominated by Google.

Ballmer’s comments have sparked mixed reactions from analysts who question if this plan B from Microsoft will be credible. Microsoft last night fell by nine cents, or 3.75pc, and so far in 2008 by 29pc.

But Ballmer is ebullient, he doesn’t believe too many trillion dollar markets are being transformed and Microsoft, with its market cap, is expertly placed to go after the opportunity.